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Terra, LUNA & UST: The Bet & Meltdown Explained

Prepared by Euan Wilson
Posted May 30, 2022

Terra came, Terra fell, and now we’re all moving on.

It’s hard to underestimate the significance of what happened a few weeks ago.

UST had a market cap of $17 billion, add that to LUNA and it equated to over $40 billion. That’s large-cap stock territory, assets with enough behind them to be safer bets than smaller ones.

And just to put this into perspective:

This wasn’t the latest airdrop of some lesser-ranked memecoin; this was an experimental but highly successful stablecoin that formed the basis of a number of incredibly popular projects. Just look at Anchor Protocol – talk of the town prior to the crash.

Now that the house of cards has come crashing down, more and more analysts are coming out with their hot takes on how they “saw it coming.”

But a few people actually did.

Let’s see what they said, when they said it – and what we can learn from it.


Twitter was the breeding ground of doubt

I want to be clear:

There were real concerns about the Terra/Luna ecosystem before it broke.

As with most things concerning crypto, Twitter was part of the story.

The best examples of doubt are from two well-known users who participated in a high-profile bet intended to demonstrate how weak Terra/Luna was.

So, what was “The Bet”?

@AlgodTrading suggested a bet of $1,000,000 for $LUNA critics to put their money where their mouth was.

There were a few takers right away – and then Player 2 entered the game.

GCR – @GiganticRebirth – upped the stakes.

Those were fighting words, and Do Kwon took the bait.

The stage was set. We had not only money, but pride on the line too.

There was the usual haggling over details, in particular over the use of market cap (remember, Luna is deflationary, burning tokens daily per its tokenomics).

The well-known @cobie would hold the bet in escrow. GCR sent his bet – $10 million, as per the agreement – over the next day in USDC.

A day later, Do Kwon made his deposit in USDT.

Both bets were in, and the one-year clock began.

But that wasn’t enough for GCR. As news of “the bet” spread, GCR tried to get Do Kwon to double the initial $10 million.

That was March 17th 2022; with Do Kwon refusing to up the ante, GCR did the only logical thing – he increased it by himself.

GCR announced his derivatives bet on $LUNA on May 7 2022. Less than 48 hours later, $UST lost the peg – and the Terra/Luna downfall began.


The Collapse

The actual collapse of Terra/Luna took place over 2-3 days between May 9-May 11, 2022. Most of you are probably familiar with the timeline, so here’s a quick recap:

May 8 – Responding to dips in the TerraUSD stablecoin, Luna Foundation Guard (LFG) began spending some of its resources to defend the peg. That meant purchasing UST with Bitcoin as well as a combination of other crypto currencies and fiat.

May 9 – Despite LFG’s increasingly-aggressive attempts to stabilize UST, the stablecoin loses the peg; you can see the turning point in the chart below:

May 10 – LFG empties its reserves, spends 33,206 BTC to purchase over 1.1 billion UST in an all-out attempt to remedy the situation. That attempt fails; between May 10-12, the UST price vacillated wildly, going as low as $0.30 and as high as $0.82 – but still well off the peg.

May 12 – LFG shifts fully into damage control mode, swapping 883,525,674 $UST to 221,021,746 $LUNA to prevent a governance attack on the ecosystem.

May 13 – By the 13th, UST had settled firmly in the teens, trading at around $0.17. Luna’s decline was even more devastating. It was trading at a few thousandths of a cent by May 13. Exactly a month earlier, Luna traded at over $86.

How did the originators of the bet make out?

GCR hadn’t exactly been idle; while holding a short position on LUNA as part of the bet, on May 12 he acquired the necessary LUNA shares to cover his position. If Luna collapsed further, he’d make millions on his short position. If the token somehow rebounded, he’d recover any losses.

How much did hedging the bet cost GCR?

A whopping $700.

Some people tried to capitalise on this quick downturn too:


The Aftermath

So where does this leave everyone?

GCR – GCR saw weaknesses with the Terra/Luna ecosystem, put his money where his mouth was, and was positioned perfectly to profit no matter what happened. Depending on his exact LUNA holdings, GCR was even eligible to receive airdropped new LUNA tokens, giving him a further benefit even if Do Kwon is able to bring the ecosystem back.

Do Kwon – Speaking of Do Kwon – the collapse of a stablecoin with an $18 billion market cap doesn’t go unnoticed. South Korea, in particular, has a number of questions for the man behind crypto’s biggest collapse. With investigations pending and special enforcement units resurfacing, Do Kwon’s future seems destined to be filled with lawyers.

Of course, there’s also the matter of restarting Terra. This time, Do Kwon dropped the algorithmic stablecoin altogether – LUNA is now the sole token, forked off from what is now Luna Classic.

The LUNAtics – Fans of UST and Luna remained vocal to the bitter end; the proposal to fork the chain into Luna 2.0 passed with 65% of validators approving the measure. There’s also the strange insistence on referring to the whole collapse as “the attack”, something that persists even in official documentation for the new chain.




We can’t talk about the collapse and rebirth of Terra without mentioning Anchor Protocol.

The relationship between the two boiled down to this: Anchor’s astoundingly high returns – 20%!!! – drew more and more investors, with UST pouring into the protocol. That led to a serious reserve deficit problem for Terra.

A bull market covers a multitude of sins, so the problem was hidden for a while. But once the collapse began, there was no way to defend the peg other than the algo. When that failed, there was no second line of defense.

This article from Delphi breaks things down clearly. It turns out that there was a second line; that was LFG, and their admirable efforts to build a currency reserve that could be deployed when the algo weakened. Review the timeline, and you’ll see that LFG managed to stave off collapse for roughly 2-3 days. That’s impressive!

Sadly, the LFG reserve was too little, too late. Had the collapse happened later in the year, with a stronger BTC, LFG might have been able to withstand the flood of outgoing UST. As it happened, LFG put up a good fight that only delayed the inevitable.

Where do things go from here?

It’s possible that the new Terra fork will be successful. With the migration of dApps over to the new chain, and dropping the UST dead weight, perhaps Luna will rebound.

The death of UST itself is noteworthy. It led to a host of “stablecoins are dead!” headlines, but it’s worth noting that algo stablecoins are basically an experimental approach to technology that is barely a decade old. Other stablecoins, like USDC, rely on a more traditional approach to collateralization.

The collapse might have been the biggest blow to the crypto economy since the infamous Mt. Gox incident. But in the long run, this is likely to fall into the same category – devastating on an individual level, but part of a broader learning curve for the market itself.

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Solana Supporting NFTs: Everything You Need To Know

Posted May 18, 2022

If you can’t beat them, join them – news that Opensea was adding support for NFTs on Solana made waves when it first dropped.

Was this yet another sign that Solana had made it, a breakthrough in Solana’s ongoing war with the other Ethereum-killer L1’s?

What does it say about NFTs? Have users finally had enough with Ethereum’s murderous gas fees?

Or will Solana have to fight to prove itself – again?

All this and more in our analysis of the biggest recent news in SOL NFTs.

Read on!


Opensea – still the biggest fish (and it’s not even close)

Getting an exact read on Opensea’s market share is tricky, but one thing’s for sure:

It’s a lot.

Like, upwards of 80%.

And in terms of attention, it’s probably even higher than that.

The Solana integration is just one example. There are other Solana NFT marketplaces, but one word of Opensea’s involvement, and all attention shifted.

That might seem unfair, but Opensea’s got the largest market share and all of the “greatest hits” of the young NFT world. CryptoPunks, BAYC, Mutant Apes, World of Women – they’re all Ethereum-based and available on Opensea.

Integrating Opensea and Solana isn’t just about adding a nice bit of functionality to an already-useful tool. Instead, think of Opensea as the primary access point for the NFT world – and it just swung open for Solana.


More NFTs, new use cases

Nothing on Solana currently can compete with the big names of Ethereum NFTs. But that could change, and the increasing volume of NFTs on Solana is one good indication.

As it stands, Solana is solidly in second place in daily NFT transaction volume. It’s too early to see if the Opensea integration leads to a significant and permanent boost – it’ll take a few months to see.

An increasing variety of use cases is another good indicator. Want an example? Take a look at the Coachella NFT golden ticket – launched on the Solana chain. NFT use cases are nearly as varied as the NFTs themselves, and sports/entertainment is just one of many possibilities. It’s interesting to see how many of these new use cases adopt Solana instead of Ethereum as their native chain moving forward.


ETH vs SOL – redux

It’s impossible to talk about Solana and Opensea without coming back around to the idea of SOL as the “Ethereum-killer.” On the surface, the fight isn’t close, at least not when it comes to NFTs.

But there are two questions worth asking:

1. Will this create added competition for Ethereum going forward?
2. How will this impact Solana – and the price of SOL?

First things first. Ethereum isn’t going to see its market dominance vanish overnight. The death of Ethereum, if it happens at all, is going to play out over months and years.

With that said, the Solana/Opensea integration shows that NFT stage one is over. The early days of dominance by a handful of collections on one marketplace are coming to an end. With new projects on new chains, the NFT world is just starting to move beyond ETH alone.

That can only be a good thing from the development standpoint. But what about price?

ETH currently holds about 20% of the total crypto market cap; SOL holds about 1.8%. Price-wise, ETH currently trades at roughly $2800, with SOL right at $100.

These aren’t looking great for the SOL vs. ETH competition.

Dig a bit deeper, and there are some interesting insights. 

The Opensea news led, as one would expect, to a quick boost in price. That was followed by the inevitable dip. But since then, SOL has held steady, avoiding much of the slog that has pulled the broader crypto market – including ETH – down dramatically over the past month.

What’s the takeaway?

Solana isn’t an overnight ETH-killer. That’s ok, because no one is! But the Opensea integration demonstrates the expansion of the NFT world while also positioning Solana better for the long haul. And it appears to have given SOlana some resilience against the current market headwinds.

The whole SOL vs. ETH conversation might just be missing the point. We’re asking SOlana to prove itself again, when so far it has passed every test.

Jump on in, Solana!

The water’s warm.